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Country Report Botswana

Country Report

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Flag Botswana
As Botswana is heading for elections, more is likely to stay the same. The same party will continue to rule (since 1966), and the country remains overly dependent on diamonds.

Strengths (+) and weaknesses (-)

(+) Strong external position

Botswana’s external creditor position remains comfortable. Botswana has USD 8bn in foreign exchange reserves, which cover 11 months of imports.

(-) Low debt burden

Public debt is low at 14% of GDP. Interest and debt service ratios are excellent. External debt, meanwhile, equals only 14% of GDP and 28% of exports.

(-) Vulnerability to fluctuations in external demand for diamonds

Botswana’s exports still mainly consist of diamonds, as the share of these minerals in total exports has grown to 81%. An export diversification program has failed so far.

(-) High income inequality

Botswana has one of the highest income inequalities in the world, with a Gini Index of 61. Meanwhile, Botswana faces high and persistent levels of unemployment.

Key developments

1. Parliamentary elections to be tighter than before, but no change expected

In the 2009 parliamentary elections, the ruling Botswana Democratic Party (BDP) received 53% of the popular vote but won 45 out of 57 directly elected seats. The BDP has been in power since the country gained independence from the UK in 1966 by winning 10 consecutive elections. This year, new parliamentary elections will take place in October.

In the past few years, president Khama, hailing from the military, has increasingly sought to centralise power in his office as well as with the Directorate of Intelligence and Security (DIS). This is definitely not a welcome move. Botswana has long been one of the most politically stable countries in the region, with a functioning democracy and proper institutions. Although the country still ranks first within Southern Africa from an institutuinal point of view, these tendencies from the central government are likely to hamper the political and business climate in the medium term.

So far, the BDP has seen both the removal as well as the defection of several of its members of parliament. In addition, one of the more powerful labour unions in the country has put its weight behind opposition candidates. Also, the opposition has been profiting from allegations towards the head of the DIS that he had misused his position for personal gain. The government tried to stop the stories from emerging in the local media, but has been unsuccessful.

Nevertheless, it is unlikely that the opposition will make too much headway. The first reason is that Botswana’s scattered opposition is unlikely to win many seats in the country’s electoral system. The second is that one of the opposition parties has lost its frontman in a recent car accident. But the most important reason is that in spite of the corruption charges, autocratic movements and remaining high inequality, the population has (so far) remained pleased with the way the country is being run.

Figure 1: Public finances improve
Figure 1: Public finances improveSource: EIU
Figure 2: Economic growth decelerates
Figure 2: Economic growth deceleratesSource: EIU

2. In spite of good economic numbers, vulnerabilities remain

Fiscal austerity measures from the government have turned the high fiscal deficit from a few years ago into a small surplus. Also, the debt position of the government is rather favourable, as the debt-to-GDP ratio amounts to less than 20%. Furthermore, the central bank has managed to keep a tight rein on inflation, which has moved into the bandwith of 3-6%, as desired. In all, the macro numbers for the government are therefore good.

Also, balance of payments risk is rather low. The current account has also returned into surplus in the past few years, as exports of goods have regained traction. There is a deficit on the financial account, but this can partially be attributed to local pension funds having insufficient investment opportunities inside the country to invest. The fact that these funds can be transferred abroad also results in a decreased risk of equity bubbles. Foreign debt to GDP also stands below 20%.

However, Botswana’s problem is the narrow base of the economy: diamonds. Mining accounts for 20% of GDP in the country, and diamonds are the dominant product. Government revenues depend for 60% on export taxes and mineral revenues. Not only does this result in a vulnerability to the international prices for diamonds, but long-term, the dependency on an exhaustive resource is unwise. Diversification efforts have so far been insufficient, with coal mine exploration only moving forward slowly and the country gradually taking up an increased role in the diamond value chain.

Factsheet of Botswana
Factsheet of BotswanaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The Republic of Botswana is a landlocked country located in Sub-Saharan Africa. Botswana has a population of just over two million, of which 400,000 people live in the capital and largest city Gaborone. Diamond mining is the leading industry and the main driver of the economy. Its dependency on external demand for diamond exports is the economy’s main weakness. On a social level, Botswana suffers from a persistently high unemployment rate. According to unofficial estimates, the unemployment rate stands at about 30%. Real GDP per capita is relatively high, but income inequality is very high as well. Compared to other Sub-Saharan African countries, Botswana scores relatively well on most social indicators. However, Botswana has a national HIV prevalence rate among adults aged 15 to 49 of 25%, one of the highest in the world. As a result, life expectancy at birth is only about 55 years. Botswana is politically and socially stable and is not embroiled in any international conflicts. The Botswana Democratic Party (BDP) has dominated Botswana’s political environment since the country’s independence from the UK in 1966, but some cracks are appearing. The BDP is expected to maintain its one-party dominance of the political scene.

Economic indicators of Botswana
Economic indicators of BotswanaSource: EIU
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Author(s)
Jeroen van IJzerloo
RaboResearch Netherlands Rabobank KEO

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